Rotary Engineering Hefty losses from SATORP

fair value estimate of S$0.34


●$66m of net loss in 3Q12
●7 quarters of profits wiped out
●SATORP JV may need recapitalization

3Q shocker
Rotary Engineering (Rotary) reported a hefty 3Q12 net loss of S$66m, mainly due to “additional costs, including provisions for foreseeable losses of $40m” for the SATORP project. Although the group had earlier warned of net losses for 3Q12 and FY12, the quantum of the loss was far worse than what we expected (we had estimated net loss of S$8m). To put things in perspective, the magnitude of the 3Q12 loss was so steep that it simply wiped out Rotary’s previous seven quarters of profits.

SATORP trouble continues
As mentioned in our previous reports, the SATORP project encountered several difficulties, including design flaws, escalating subcontracting costs, work sequencing issues and harsh working conditions, resulting in the cost over-run situation. Management assured us it is working hard to rectify these issues and “things are now under control”. It is determined to complete the job to maintain its reputation, even if it meant incurring more expenses. Accordingly, it has reassessed the project budget and made the necessary provisions. Management also believes that the SATORP project is on schedule for completion by
end-2012.

Impairments and restructuring
During the quarter, the group recorded S$12m of impairments relating to its LNG logistic associate as the business had turned unviable. It also trimmed its admin and other operating costs (excluding FX) such that they are at 10% of revenue (previously: 11-14%). Despite these measures, we think it may still be too early to turn positive. One other risk is the need to recapitalize its 51%-owned JV that is currently working on the SATORP project. (Note: Rotary’s non-controlling interests showed S$65m of deficit as of end- Sep 2012). We updated our model for the quarter results and maintain SELL with lower fair value estimate of S$0.34 (still based on 0.8x FY13F BPS).